Broken China? No, more a storm in a teacup

By: Viola Caon | 20 Jul 2015

NN Investment Partners (NNIP) is looking to China for value opportunities in its Emerging Markets and Asia dividend funds, after the recent market rout.

Robert Davis, senior portfolio manager of the NN Emerging Markets High Dividend Strategy and of the NN Asia ex Japan High Dividend Strategy, commented: “We’ve seen a rare and very public example of Chinese policy failure in its recent handling of its equity markets, resulting in a serious market correction.

“However, we think that a combination of the unwinding of leverage which caused the problem in the first place and the fact that the policy response is now immense will likely see markets bottom around these levels. An indiscriminate sell-off caused by margin calls will provide interesting buying opportunities”.

Healthy equity markets are an important component of the Chinese government’s broader plans to reduce debt in the economy. Strong markets allow IPOs and other forms of equity raising, effectively converting debt into equity.

By encouraging retail investors to participate without monitoring leverage levels, the local markets rallied by more than 130% in a few months fuelled by ballooning margin trading. When the authorities woke up to the issue and tried to reign in leverage, it pricked the bubble it had created.

It’s noteworthy that the rise and fall in the Shanghai Composite Index exactly mirrors the increase and then contraction of margin lending by Chinese brokerages.